Sector Update

March 16, 2020

Well, where to even begin? First, I can’t suggest enough looking at the Weekly Market Recap. Second, just like last week, the news over the weekend once again dominates Monday morning. The big news this weekend was the emergency announcement by the Federal Reserve. The overnight rate was cut 100 bps to a range of 0.0% – 0.25% and, perhaps more importantly to Depositories, the Interest on Excess Reserves (IOER) was cut to 0.10% from 1.10%. For those keeping score, it was at 1.60% just nine trading sessions ago. They also initiated a $700 Billion bond buying program. $500 Billion is directed to Treasurys and $200 Billion is directed to Agency MBS. Once you see the spreads in the “Food for Thought” section, you will understand why.

Other news since close of business Friday includes, but is not limited to:

Markets opened this morning with stocks almost immediately hitting the 7% circuit breaker marking the third time in six trading sessions this has occurred. Understandably, Treasury yields are backsliding after increasing in yield last week. Right now, it appears the US is on a “slow roll” to a European style full shut down.

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Food for Thought

Considering the Treasury Yield and Spread Snapshot below, I want to continue looking at sectors where spreads have widened significantly. Last week we considered tax-free Municipal bonds, where we have seen heightened activity. This week, I want to look at Agency mortgage spreads, and by extension, Agency CMOs. Spreads on 15- and 30-year MBS are extremely wide, reaching levels not seen in many years. Spreads have tightened approximately 15-20 bps on the recent Fed announcement of $200 Billion in planned purchases but still remain historically wide.

What We’re Reading

Market Today | Daily

Weekly Recap | Weekly, Friday

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

MBS Prepay Commentary (March) | Monthly, 5th business day

SBA Prepay Commentary (March) | Monthly, 10th business day


WSJ: Diary of a Crazy Week in the Markets

“The Wall Street Journal spoke to traders, investors, bankers and executives over the course of a week that many compared to the 2008 meltdown or the days after the Sept. 11 terrorist attacks. What follows is an edited diary.”

CNBC: US airlines seek more than $50 billion in government assistance

“The aid, if received, would be the industry’s first broad bailout since the wake of the Sept. 11, 2001 attacks.”

Vining Sparks: Loan Trading: Recreation Vehicle Performance Update

“We receive monthly performance reports on over $600mm of RV balances. We have seen a slowdown in production in recent quarters and this has also been seen across the broader industry. Although shipments have increased by nearly 150% over the last 10 years, 2019 showed a decline in shipments by 16%. This decline has reversed in 2020, with total RV shipments growing by 29% in January.”

Sector Updates

Adjustable Rate Mortgage Market Update

Hybrid ARM spreads continued to widen as the broader fixed income market remained volatile.  5/1 and 7/1 cohorts widened 10 basis points while longer-reset 10/1s widened 20 bps.  In the last month, Ginnie 3/1 and 5/1 spreads have widened approximately 30 basis points while conventional ARMs have widened 40 to 55 basis points.  At these attractive wides, ARMs outperformed mortgage-related sectors with 15- and 30-year fixed-rate mortgages widening 42 and 43 basis points, respectively, on the week.

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Agency Market Update

agency bullets and callables both widened meaningfully on the week.  Agency bullets with 2- to 5-year maturities widened by 14 to 17 basis points and are now trading at 23 to 25 basis point spreads over Treasuries.  These are now the widest spreads on agency bullets in approximately 8 years.  Callables also widened but not nearly to the same degree as agency bullets.  Right now there is only a ~10 basis point difference between callables with 3-month versus 1-year lockout.

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Fixed Rate Mortgage Market Update

There was significant volatility in the Agency MBS market last week due to an abundance of new supply. On a week-over-week basis, nominal spreads on current coupon MBS compared to Treasurys widened over 40 bps, to levels unseen in years. Spreads on 15-year increased 42 bps to 110 bps, while spreads on 30-year increased 43 bps to 153 bps.   

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Municipal Market Update

Municipal prices started the week stronger, weakened daily through Thursday and on Friday prices were unchanged. New-issue offerings are forecasted to be $5.0B for the trading week.

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SBA Market Update

Current yield spreads on newer and seasoned SBICs have widened over the last several weeks and are pricing at approximately 80 bps or wider to Treasuries (I-curve). Spreads on fixed-rate DCPC pools widened 14 bps month over month for the longer terms (68 bps yield spread for the 25-year term and 55 bps for the 20-year term) and are wider than the twelve-month average for all maturity terms.

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CMO Market Update

As has been the case since rates began their descent last year, the CMO space offers good relative value in the form of wide nominal spreads. For context, we previously estimated that spreads on 3 year PACs and Sequentials were well above their 1- and 3-year averages, by as much as one standard deviation. It was true last week. And now, after the Fed cut rates Sunday afternoon, it is true today.

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